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Why Lennar’s Focusing More on First-Time Buyers

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Gross margins fell

In the second quarter, Lennar’s (LEN) gross margins fell 190 basis points sequentially to 22.7%. Last year, the first-quarter gross margins were 23.1%, a fall of 40 basis points. The year-over-year comparisons tell you much more than the sequential changes since homebuilding is very seasonal.

Interestingly, Lennar is committed to the first-time homebuyer and still guiding for gross margins of 23%–24% for 2016. Given that entry-level home pricing is lower, margins are typically lower, which shows that Lennar feels it can meet strong demand without cutting prices.

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Branching out into the hot rental market

We’re seeing a continuing trend in growth in multifamily construction with close to 1.3 million building permits. Lennar is building out its multifamily construction sector to take advantage of the hot rental market. Toll Brothers (TOL) is hitting this area as well but focusing more on urban luxury apartments.

Lennar isn’t the only builder increasing its focus on the first-time homebuyer. While starter homes may have lower margins, there’s a tremendous need for affordable housing. D.R. Horton (DHI) launched a new brand targeting entry-level buyers. KB Home (KBH) has exposure there as well.

Soon we’ll hear from PulteGroup (PHM). It’s a large, diversified builder with exposure at the lower price points. An alternative way to invest in the homebuilding sector is the SPDR S&P Homebuilders ETF (XHB) or the iShares U.S. Home Construction ETF (ITB).

Focus on the first-time homebuyer

Lennar is focusing on the high-end, first-time homebuyer and the move-up market, so its average selling prices remain higher than D.R. Horton or PulteGroup in addition to its geographic exposure.

Given the plight that Millennials find themselves in, many have become renters. Lennar has been building out its apartment strategy, and it benefited from good timing. Rents are soaring, and vacancies remain at historic lows. This approach is a good way for the company to take advantage of current conditions and wait for the first-time homebuyer to return.

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